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Chilean Executive Branch introduces tax bill
February 2024
In brief
What happened?
The Chilean Executive Branch submitted to the Chilean Congress on January 29 a new ‘Fulfillment of Tax Obligations’ tax reform bill (the ‘Bill’), which aims at increasing tax collection.
Why is it relevant?
The Bill adopts measures to address tax evasion and avoidance, and modernize the Chilean tax administration, and also proposes changes to the Chilean Income Tax Law, Value Added Tax Law, and Tax Code, among others.
What to consider:
Multinational companies with operations/presence in Chile should monitor the legislative process to assess whether there may be changes in the current tax system that could impact their current or future structures and transactions.
Included below is a summary of some aspects of this proposal submitted by the Executive Branch. Note that there are other important tax modifications included in the Bill which are not covered in this alert, e.g., transfer pricing.
In detail
Selected modifications to Chilean Tax Code
I. General Anti-Avoidance Rule (GAAR)
The Bill modifies the definition of both ‘abuse’ and ‘simulation’ currently included in Chilean GAAR, emphasizing that the key feature of an ‘abuse’ is obtaining tax benefits in an ‘improper’ way, i.e., when the legal form of a transaction does not align with the economic effect sought by the taxpayer when entering into the transaction.
In addition, the Bill repeals the current judicial procedure allowing application of the rule through a purely administrative procedure, creating the Anti-Avoidance Committee and the GAAR Advisory Panel. This change could result in broader application of the rule.
II. Chilean Tax Authority Assessment Power
As a general principle, the Chilean Tax Code allows the Chilean tax authority to challenge transactions executed at a value which significantly differs from ‘normal market value.’
The Bill defines ‘normal market value’ as the value that third parties would have agreed in comparable transactions and circumstances, taking into account the relevant characteristics of the industry, sectors, functions, assets and risks, etc.
Under the proposed Bill, taxpayers should follow these valuation methods to prove that a transaction has been performed at fair market value:
a) Discounted cash flow method
b) Multiples method (estimated value based on certain referential ratio values of similar characteristics)
c) Adjusted book value method
d) Other valuation methods.
If the Chilean tax authority challenges a taxpayer’s valuation, it would need to use one of the aforementioned methods and may require information from foreign authorities (if applicable).
III. Business Reorganizations
The tax neutral regime applicable to business reorganizations is modified, distinguishing between domestic and international reorganizations.
A domestic reorganization (mergers, spin- offs, contributions of assets made within Chile, etc.) will be tax neutral provided it has a legitimate business reason. In addition to being tax neutral, the tax basis in the transferred assets should be carried forward to the receiving entity, and in the case of asset contributions, the contributing entity may not receive cash.
An international reorganization will be tax neutral if it has effects in Chile (e.g., it relates to assets, shares or quota rights located in the country), and:
- it has a legitimate business reason
- it has been carried out within a business group
- the contributing entity does not receive cash (for the case of contributions)
- the tax basis in the transferred, assigned or contributed assets is carried over to the acquiring entity
- the legal requirements of other jurisdictions involved in the transaction have been met
- and Chile’s taxing rights are not impacted.
Selected modifications to Chilean Income Tax Law
I. Chilean Indirect Transfer Rules
The Chilean indirect transfer rules apply a ‘Tax Haven Test,’ under which the capital gain derived from the transfer of interests in an entity domiciled or incorporated in a jurisdiction deemed to be a tax haven for Chilean tax purposes, which indirectly holds Chilean assets, would be subject to Chilean nonresident withholding tax at a 35% rate (this test applies regardless of the value of the Chilean company indirectly transferred).
Under current law, the Tax Haven Test does not apply if: (i) a Chilean tax resident neither holds directly 5% or more of the equity, nor has the right to 5% or more of the profits of the transferred foreign entity; and (ii) a person resident in a tax haven neither holds, directly or indirectly, 50% or more of the equity, nor has the right to 50% or more of the profits of, the transferred foreign entity.
The Bill modifies the 5% requirement discussed under prong (i) of the test discussed in the previous paragraph, by clarifying that such holding requirement also can be tested on an indirect basis (current wording is limited to a direct holding).
Selected modifications to Chilean VAT Law
I. VAT on the transfer of assets located abroad
Under current VAT law, in general the sale of goods located outside of Chilean territory is not subject to VAT. The Bill proposes that goods located abroad will be deemed to be located in Chile, and therefore their sale will be subject to VAT, when such goods are remotely acquired from a non-Chilean resident, by a person that is not considered a VAT taxpayer for Chilean purposes, provided that the goods are destined to Chilean territory and the sales price does not exceed USD 500.
Broadly speaking, the tax compliance procedure currently in place for digital services would apply in these cases, and thus, the operator of a digital platform intermediating these transactions would be considered the VAT taxpayer. The Bill also extends to this case the application of the simplified registration procedure currently in place for digital services. Alternatively, credit card issuers or payment processors could be appointed as withholding agents.
II. VAT Anti-avoidance rules
The Bill proposes two special anti-avoidance rules regarding personal property and real estate:
Business reorganizations: currently, the transfer of personal property and real estate held as fixed assets is subject to VAT, but when the transfer occurs as part of a business reorganization VAT is generally not applicable. The Bill proposes to levy VAT on those transfers even if they take place as part of a business reorganization, when the main purpose of the reorganization is avoiding VAT.
Recharacterization of stock transactions: Under the proposed Bill, the Chilean tax authority may recharacterize as a sale of Chilean real estate the sale of shares, quotas, bonds or other securities convertible into shares, quotas, or ownership rights, if at least 50% of the market value of the interest transferred derives, directly or indirectly, from Chilean real estate, and provided the main reason for transferring such interest is avoiding the VAT that would be due if the real estate had been directly transferred.
Tax Amnesty
The Bill proposes two tax amnesty programs that would allow:
- Reporting unreported foreign assets and income, which would be subject to a 12% substitute tax on the value of the assets and income, and
- Opting for an early termination of an ongoing tax litigation (excluding cases involving tax crimes) with an abatement of accrued interest and fines.
In addition to this Bill, the Chilean Government is expected to submit to Congress an additional tax reform bill mostly focused on other amendments to Chilean income tax law, potentially including the adoption of Pillar Two rules.
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